How to Simplify Accounting in One Year

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The Securities and Exchange Commission has established a committee to figure out how to take complexity out of financial reporting. Headed by Robert Pozen, chairman of MFS Investment Management, the group will submit a report to the SEC by next August.

The advisory committee’s tasks include looking at how accounting and reporting standards are set, and whether some of these rules create unnecessary cost for companies. The group’s considerations will range from the minor — such as whether 10-Ks should include a simplified summary of a company’s financial standing — to the major — such as how technology can improve the usability of financial reports. For example, companies’ increased use of XBRL (extensible business reporting language) could lead to financial reports that can be drilled down via a few clicks on a computer, noted Robert Herz, chairman of the Financial Accounting Standards Board, during an SEC press conference on Wednesday. He envisions a financial report that allows investors to quickly move from top-line revenue numbers to the revenue and profit margin of one product within a few mouse clicks.

Herz considers less complex financial reporting as one of his passions and has rallied along with the SEC to simplify accounting standards during his tenure. Currently, FASB is working to converge its rules with more principles-based international accounting rules by 2008. Meanwhile, anti-regulation groups, such as the Committee on Capital Markets Regulation (of which Pozen is a member) have called on regulators to incorporate more principles-based standards in recent months. Indeed, SEC Chairman Christopher Cox noted during a House Financial Services Committee hearing held on Tuesday that Congress has been pushing the SEC to explore a move to a more principles-based system for the past five years.

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In addition, the U.S. House of Representatives recently passed a bill — unanimously — that would require the SEC, FASB, and the Public Company Accounting Oversight Board to report to Congress about “their efforts to promote transparency in financial reporting.” The new SEC advisory committee seems to be a direct response to that call from Congress.

Herz has said a reduction in detailed rules and bright lines in financial reporting could happen only through a coordinated effort of the SEC, FASB, and the PCAOB, which sets auditing standards. The three groups presented a united front during the press conference announcing the formation of the committee and Pozen’s appointment. “It has been my view that our system of overly complex rules have impeded the overall transparency, understandability, and overall usefulness of investors and other people who use that information,” Herz said, accompanied by Pozen, Cox, PCAOB chairman Mark Olson, and SEC chief accountant Conrad Hewitt.

Pozen, a former vice chairman of Fidelity Investments and professor at Harvard Law School, will be joined by 13 to 17 other members, who have yet to be appointed by the SEC. The commission plans to name them before the committee has its first meeting in early August, Cox said. Representatives from the SEC, FASB, the PCAOB, and the International Accounting Standards Board would participate in the open meetings as observers.

The SEC won’t be waiting an entire year before formally exploring whether to allow companies to use a more principles-based accounting system. Later this summer, the commission will publish a concept release to see how the public would react if the regulator let U.S. companies use international financial reporting standards (IFRS). In May, the SEC proposed giving foreign issuers that list on U.S. exchanges permission the opportunity to use only IFRS starting in 2009. If approved, foreign companies registered with the SEC will no longer have o reconcile their IFRS financial statements with U.S. generally accepted accounting principles.